Tuesday, May 19, 2015

Handshake Agreements: Still a Good Idea?

I’ve seen this many times before: entrepreneurs enter into handshake agreements with others, trying to save on legal fees. Often, the counterparties are contractors, employees, investors, or co-founders. These entrepreneurs are not entirely wrong to do so. Oral agreements are still enforceable for the most part. Here is a short summary of when handshake agreements can be enforced in a court of law, when agreements must be in writing, and why it is still a good idea to write it all down.

What You Need to Do To Make an Oral Agreement Enforceable

Most agreements can be oral. The exception is agreements that are required to be in writing by the Statute of Frauds (see below). Like any other contract, oral agreements are enforceable if they have all the requisite terms: an offer, an unconditional acceptance of that offer, and an exchange of consideration. The contracting parties must be capable of contracting (no minors please), and they must be in consensus, i.e, have a “meeting of the minds.” The existence of oral agreements may be difficult to prove: a party’s word might not be enough. So, you need to dig up other evidence that a contract existed, such as receipts, emails, photographs, memos, testimony of third parties, etc.

These Agreements Must Be in Writing

I’d like to introduce a new (for some) legal concept: the Statute of Frauds. The exact requirements vary state by state, but here are the essentials: the Statute of Frauds tells us which contracts MUST be in writing in order to be enforceable. Here is the list:
  • Contracts that cannot be performed within a year
  • Contracts relating to transfer of interests in real property (including options to purchase and leases)
  • Contracts by which a person agrees to pay or guarantee another person’s debt
  • Prenuptial agreements
  • Contracts for the sale of goods for $500 or more.
Even if a contract does not specify its duration, courts can infer it from the intention of the parties. For example, this can happen to oral employment agreements if the court determines that the intended duration of the employment relationship was for over a year.

Why It is Still Better To Write Things Down

We are all optimistic about the future of our relationships. We firmly believe that nothing bad will happen to our venture because we trust one another. Unfortunately, few things can happen. First, without even realizing it, we may fail to agree on ALL aspects of our business deal. Yes, we discussed the essentials, but perhaps failed to think through all of the steps. Second, memory fades. If we base our agreement only on a handshake, we may find it difficult to recall some of the terms down the road. Third, we may have misunderstood one another, and won’t realize it until it is too late.

Writing things down allows parties to negotiate all of the aspects of the proposed transaction. Let’s take a software consulting agreement as an example. Defining the scope of services, the time frame for the delivery of services, the acceptance process, the payment amount and timetable, ownership of IP (both created and pre-existing), the term of the agreement, who can terminate the agreement and with what consequences, etc. takes time and effort. Often I find that parties haven’t even thought about some of the specific terms that they need to agree on in order for their project to work. A contract can be viewed as an ultimate expression of the parties' intentions. It should overrule everything that’s been said during the negotiations. Only what is in writing matters. That’s why a well-written contract should address all scenarios that can happen in a project. A party failed to deliver services on time? No problem, check Section 3(a) for the remedies available to you. You are not satisfied with the quality of the service? Check Section 4. You still haven’t received payment? Go to Section 5… and so on.

Conclusion

It is not always necessary to hire lawyers to draft contracts. A quick summary of all essential terms, signed by both parties, even if it is in an email or on the back of a napkin, will suffice. But if you can afford it, hire a professional to help you draft a full-blown agreement. It is like having insurance, - it might protect you down the road.

This article is not a legal advice, and was written for general informational purposes only.  If you have questions or comments about the article or are interested in learning more about this topic, feel free to contact its author, Arina Shulga.  Ms. Shulga is the founder of Shulga Law Firm, P.C., a New York-based boutique law firm specializing in advising individual and corporate clients on aspects of business, corporate, securities, and intellectual property law.

Monday, January 19, 2015

How to Comply with New York Blue Sky Laws?

As I previously explained here, Rule 506 private placements involve the filing of a Form D with the SEC as well as complying with blue sky notice filings requirements in each state where the investors participating in the offering reside.  Rule 506(b) or (c) offerings are exempt from regulation on the state level. According to the National Securities Markets Improvement Act, securities offered under Rule 506 of Regulation D qualify as "covered securities" under Section 18(b)(4) of the Securities Act. Consequently, securities sold under Rule 506 enjoy an exemption from the registration requirements of state-level securities laws (blue sky laws).

But states can (and do) ask the issuers to make notice filings and pay filing fees with respect to Rule 506 private placements if any of the investors are their residents.  In this blog post, I am going to discuss how to do a blue sky filing in New York.

The filing requirement for general securities offerings is set out in Section 359-e of the New York General Business Law. The filing requirement for offerings of real estate securities is set out at Section 352-e of the New York General Business Law. The NY regulator is the Investor Protection Bureau (or Real Estate Finance Bureau) of the State of New York Office of the Attorney General.  

The first thing you need to know about the blue sky filing in New York is that it must be done before any offer or sale is made in the State of New York.  So, what should you send them?
  • Two copies of completed Form 99 (one is manually signed).
  • A copy of the private placement memorandum. 
  • Notice of appearance.
  • Form D.  If it hasn't been filed yet with the SEC, then follow up with the printout of the Form D as filed later.  
  • A copy of the consent to service of process (the original should be sent to the NY Department of State).
  • A check for the blue sky filing fee.
But the notice filing obligation does not end here.  The Department of State, Division of Corporations should receive from the company the original consent to service of process (with a special "backer") and a $35 check.

And that's not all.  The Miscellaneous Records Bureau of the Department of State should receive the original State Notice and Further State Notice and two checks for $75 each (this applies if the issuer is not a NY entity).

A word about fees.

For general securities offerings:
  • $300 for an offering of up to $500,000.
  • $1,200 for an offering of over $500,000.
For offerings of real estate securities:
  • $1,050 for an offering up to $500,000.
  • $1,950 for an offering of over $500,000.
Considering that these filings can be viewed as onerous and expensive, it is not a surprise that some NY attorneys have adopted a position that no blue sky filing or fee is required.  It is certainly supported by the 2002 position paper prepared by the Committee on Securities Regulation of the New York State Bar Association. However, this position paper has not been accepted by the Office of the Attorney General of New York. 

This article is not a legal advice, and was written for general informational purposes only.  If you have questions or comments about the article or are interested in learning more about this topic, feel free to contact its author, Arina Shulga.  Ms. Shulga is the founder of Shulga Law Firm, P.C., a New York-based boutique law firm specializing in advising individual and corporate clients on aspects of business, corporate, securities, and intellectual property law.

The SEC Increases Focus On Digital Currencies

It is clear that the SEC has been focusing on securities fraud involving digital currencies.  In July 2013, the SEC charged Trendon T. Shavers, the founder and operator of Bitcoin Savings and Trust, with defrauding investors in a Ponzi scheme involving Bitcoin.   In June 2014, the SEC charged a Bitcoin-related website owner with publicly offering shares in his venture without first registering them.  I previously wrote about these actions here and here.  On December 8, 2014, the SEC issued a press release announcing yet another enforcement action relating to digital currencies.  This time, it was against Ethan Burnside, a computer programmer who operated two online portals that traded securities using Bitcoin and Litecoin without registering the portals as broker-dealers or stock exchanges.  Mr. Burnside was also sanctioned for conducting unregistered securities offerings.

From August 2012 to October 2013, Mr. Burnside and his company BTC Trading Corp. operated BTC Virtual Stock Exchange and LTC-Global Virtual Stock Exchange.  These exchanges allowed users to use Bitcoin or Litecoin to buy, sell and trade securities of businesses listed on the exchanges' websites.  The exchanges weren't registered as broker-dealers or stock exchanges.  Separately, Mr. Burnside offered investors opportunities to buy shares of LTC-Global Virtual Stock Exchange and a separate Litecoin mining venture.  A copy of the SEC order is found here.

The current SEC position with respect to Bitcoin and other digital currencies is pretty clear.  As the SEC Chairman Mary Jo White stated in her August 30, 2013 letter, although virtual currency itself may not be a "security" subject to the SEC enforcement, interests that are issued by entities that own or trade virtual currencies are securities, and therefore are subject to the SEC regulation.

Another proof that the SEC has intensified its focus on digital currencies, in addition to more frequent enforcement actions, is the fact that in its December 8th press release, the SEC highlighted the existence of a multi-office Digital Currency Working Group. Although the Group was actually formed in 2013, the SEC has not publicly linked it to any enforcement action until the press release of December 8th.  This Group has approximately 50 members from different SEC divisions and offices.

As Bitcoin and other digital currencies become more prominent in our daily lives, the regulatory focus on digital currencies also increases.  If Bitcoin, Litecoin and other ditigal currencies are here to stay, they need to be regulated, and laws relating to them should be enforced.

This article is not a legal advice, and was written for general informational purposes only.  If you have questions or comments about the article or are interested in learning more about this topic, feel free to contact its author, Arina Shulga.  Ms. Shulga is the founder of Shulga Law Firm, P.C., a New York-based boutique law firm specializing in advising individual and corporate clients on aspects of business, corporate, securities, and intellectual property law.